Discretionary family trusts have become commonplace it today’s society. Whether established for tax purposes or other imposts, this type of trust is significant in the overall asset management of a family.
In basic terms, the family trust appoints a trustee to hold legal title of certain property and employ discretion in applying the income or capital of the property to the beneficiaries of the trust. What must be noted though is that every beneficiary holds an important right to ensure the trustee “properly administers the trust in accordance with the trust deed”. That is, appropriately exercises his or her powers and obligations arising from the trust.
Only a few years ago, the High Court’s decision in the case of Kennon v Spry gained significant interest as the first decision by the Court to deal with trust property under the Family Law Act. The involved Dr. Spry first establishing a discretionary family trust upon which he was the sole trustee and which named himself and his siblings, their wives and children as beneficiaries. However, he later excluded himself as a beneficiary of the Trust for land tax purposes and again varied the Trust years later to further remove himself and his wife as capital beneficiaries. Post separation, the husband established a series of trusts for the benefit of the children of the marriage, however upon commencing proceedings in the Family Court it was found that the husband, in anticipation of inevitable division of marital assets, had pursued these measures with an intention to prevent his wife from getting certain property.
Issues that arose before the court included:
- Whether the property of a discretionary trust is capable of being subject to an order pursuant to s79 of the Family Law Act, that is, forming part of property settlement between the parties?
- By Dr Spry amending the trust deed to remove both him and his wife as beneficiaries, did this cause the property of the trust to be removed as property capable of being subject to an order under s79?
- Could the new trusts in favour of the children to the marriage, constitute a post-nuptial ‘settlement’ in regards to s85A of the Family Law Act?
- Does divorce automatically eliminate a spouse from beneficiaries to a trust defined as, for example “Person X and their spouse”?
In determining these issues the Court provided that in most cases, Family Trusts, even if established before the marriage, can be included in a family law property settlement if:
- The husband or wife is the “Trustee”, “Settlor” or “Appointer” of the Family Trust and holds control over how the Family Trust operates;
- Either or both of the husband and wife are beneficiaries of the Family Trust; and
- The assets of the Trust have developed because of financial and non-financial contributions made by the husband and wife during the course of the marriage.
The end result was seen as disastrous for the husband, particularly considering the hefty extra interest payments and costs he was ordered to pay on top of orders for him to pay a significant sum in a generally plummeting market of real estate and investments. However, in terms of the effect of the case on Family Law provisions, the only substantial extension of the law has been in relation to the definition of ‘property’, and the lesson to be learnt is that now under the Family Law Act, ‘property’ can include assets that a party to a marriage may be ultimately entitled to.